a

GAO

United States Government Accountability Office

Report to the Chairman, Subcommittee 

on Housing and Community Opportunity, 

Committee on Financial Services, House 

of Representatives

September 2005 MORTGAGE 

FINANCING

FHA’s $7 Billion 

Reestimate Reflects 

Higher Claims and 

Changing Loan 

Performance 

Estimates

GAO-05-875
What GAO Found

United States Government Accountability Office

Why GAO Did This Study

Highlights

Accountability Integrity Reliability

www.gao.gov/cgi-bin/getrpt?GAO-05-875.

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Shear at (202) 512-8678 or shearw@gao.gov.

Highlights of GAO-05-875, a report to the 

Chairman, Subcommittee on Housing and 

Community Opportunity, Committee on 

Financial Services, House of 

Representatives 

September 2005

MORTGAGE FINANCING 

FHA's $7 Billion Reestimate Reflects 

Higher Claims and Changing Loan 

Performance Estimates 

The $7 billion reestimate was due primarily to an increase in estimated and 

actual claims over what FHA previously estimated. For example, actual 

claim activity in fiscal year 2003 exceeded estimated claim activity for 

2003—by twice as much in some cases—for the majority of loan cohorts. 

Prepayments also played a role in the reestimate as they were higher than 

previous estimates. In fact, actual prepayment activity during 2003 exceeded 

estimated prepayment activity for all cohorts. Because of the additional 

claims it paid, upfront premiums it refunded, and the annual premiums it 

lost, FHA’s net cash outflows for the year increased, contributing to the $7 

billion adjustment of the Fund’s credit subsidy. 

Several recent events may help explain this increase, including changes to 

underwriting guidelines, competition from the private sector, and an 

increase in the use of down payment assistance. FHA has taken some steps 

to tighten underwriting guidelines and better estimate loan performance, 

though it is not clear that these steps are sufficient to reverse recent 

increases in actual and estimated claims and prepayments or help FHA to 

more reliably predict future claim and prepayment activity. Increases in 

claim and prepayment activity are likely to continue to add risk to FHA’s 

portfolio. 

Actual Versus Estimated Claim and Prepayment Rates for FY 2003 

0

10

20

30

40

50

0

1

2

3

4

5

1993 1995 1997 1999 2001 2003 1993 1995 1997 1999 2001 2003

Cohort Cohort

Percentage Percentage

Claim rate Prepayment rate

Actual

Estimate

Source: GAO analysis of FHA data.

The U.S. Department of Housing 

and Urban Development (HUD), 

through its Federal Housing 

Administration (FHA), provides 

insurance for private lenders 

against losses on home mortgages. 

FHA’s largest insurance program is 

the Mutual Mortgage Insurance 

Fund (Fund), which currently is 

self-financed and operates at a 

profit. FHA submitted a 

“reestimate” of $7 billion for the 

credit subsidy and interest for the 

Fund as of the end of fiscal year 

2003, reflecting a reduction in 

estimated profits. Given this 

substantial reestimate, you asked 

GAO, among other things, to 

determine what factors contributed 

to the $7 billion reestimate and the 

underlying loan performance 

variables influencing these factors 

and to assess how the loan 

performance variables underlying 

the reestimate could impact future 

estimates of new loans. 

 

What GAO Recommends

To more reliably estimate program 

costs, the Secretary of HUD should 

direct the FHA Commissioner to 

study and report the impact of 

variables that have been found in 

other studies to influence credit 

risk. When changing the 

definitions of key variables, FHA 

also should report the impact such 

changes would have had on the 

forecasting ability of its loan 

performance models. In written 

comments, HUD generally agreed 

with GAO’s overall findings. 
Page i GAO-05-875 Mortgage Financing

Contents

Letter 1

Results in Brief 3

Background 4

The $7 Billion Reestimate Is Significant for Its Size and Direction 9

The $7 Billion Reestimate Primarily Reflects Higher-Than-Estimated 

Claims 13

The Loan Performance Variables Underlying the $7 Billion 

Reestimate Will Likely Affect Future Credit Subsidy Estimates, 

but Are Being Addressed 19

The Loan Performance Variables Underlying the Reestimate Could 

Affect Estimates of the Fund’s Long-Term Viability 26

Conclusions 31

Recommendations for Executive Action 31

Agency Comments and Our Evaluation 31

Appendixes

Appendix I: Scope and Methodology 34

Appendix II: Data for Figures Used in This Report 36

Appendix III: Comments from the Department of Housing and Urban 

Development 42

Appendix IV: GAO Contact and Staff Acknowledgments 44

Tables Table 1: Annual Credit Subsidy Reestimates For the MMI Fund, 

Fiscal Years 2000-2004 (Figure 3) 36

Table 2: Amount of the 2003 Reestimate Attributed to the 2001-2003 

Cohorts, as a Percentage of the Original Loan Amount, For 

Single-Family Loan Guarantee Programs (Figure 4) 36

Table 3: Original Estimated Credit Subsidy Rates and Most Recent 

Reestimated Rates for the FHA and VA Loan Guarantee 

Programs, 1992-2004 Cohorts (Figure 5) 36

Table 4: Primary Factors Contributing to the Fiscal Year 2003 MMI 

Credit Subsidy Reestimate (Figure 6) 37

Table 5: Change in Future Cash Flow Estimates for the Fund from 

Fiscal Year 2002 to Fiscal Year 2003 (Figure 7) 38

Table 6: Variables Contributing to the $3.9 Billion Change in 

Estimated Cash Flows (Figure 8) 38
Contents

Page ii GAO-05-875 Mortgage Financing

Table 7: Increase in Estimated Net Cash Outflows from Removing 

the Loss Mitigation Adjustment Factor, 1992-2003 Cohorts 

(Figure 9) 38

Table 8: Actual Versus Estimated Conditional Claim Rates for 

Fiscal Year 2003, 1993-2003 Cohorts (Figure 10) 39

Table 9: Actual Versus Estimated Conditional Prepayment Rates 

for Fiscal Year 2003, 1993-2003 Cohorts (Figure 10) 39

Table 10: Amount of FHA Prepayments During Fiscal Years 

2000-2004 (Figure 11) 40

Table 11: Capital Ratio Versus Economic Value of the MMI Fund, 

Fiscal Years 2000-2004 (Figure 12) 40

Table 12: Amortized Insurance-In-Force, Fiscal Years 2000-2004 

(Figure 13) 40

Table 13: Minimum Required Capital Ratio Versus Actual Capital 

Ratio (Figure 14) 41

Figures Figure 1: Calculation of Credit Subsidy for the Fund 6

Figure 2: Relationship between Actuarial Review and Reestimate 8

Figure 3: Annual Credit Subsidy Reestimates for the MMI Fund, 

Fiscal Years 2000-2004 10

Figure 4: Amount of the 2003 Reestimate Attributed to the 

2001-2003 Cohorts, as a Percentage of the Original Loan 

Amount, for Single-Family Loan Guarantee Programs 11

Figure 5: Original Estimated Credit Subsidy Rates and Most Recent 

Reestimated Rates for the FHA and VA Loan Guarantee 

Programs, 1992-2004 Cohorts 13

Figure 6: Primary Factors Contributing to the Fiscal Year 2003 MMI 

Credit Subsidy Reestimate 14

Figure 7: Change in Future Cash Flow Estimates for the Fund from 

Fiscal Year 2002 to Fiscal Year 2003 15

Figure 8: Variables Contributing to the $3.9 Billion Change in 

Estimated Cash Flows 16

Figure 9: Increase in Estimated Cash Outflows from Removing the 

Loss Mitigation Adjustment Factor, 1992-2003 Cohorts 17

Figure 10: Actual Versus Estimated Conditional Claim and 

Prepayment Rates for Fiscal Year 2003, 1993-2003 

Cohorts 19

Figure 11: Amount of FHA Prepayments during Fiscal Years 

2000-2004 23

Figure 12: Capital Ratio Versus Economic Value of the MMI Fund, 

Fiscal Years 2000-2004 27

Figure 13: Amortized Insurance-In-Force, Fiscal Years 2000-2004 29
Contents

Page iii GAO-05-875 Mortgage Financing

Figure 14: Minimum Required Capital Ratio Versus Actual Capital 

Ratio 30

Abbreviations

FCRA Federal Credit Reform Act

FHA Federal Housing Administration

HUD U.S. Department of Housing and Urban Development

OMB U.S. Office of Management and Budget

USDA U.S. Department of Agriculture

VA U.S. Department of Veterans Affairs

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Page 1 GAO-05-875 Mortgage Financing

United States Government Accountability Office

Washington, D.C. 20548

A

September 2, 2005 Letr

The Honorable Bob Ney

Chairman

Subcommittee on Housing and Community Opportunity

Committee on Financial Services

House of Representatives

Dear Mr. Chairman:

The Department of Housing and Urban Development (HUD), through its 

Federal Housing Administration (FHA), provides insurance for singlefamily home mortgage loans made by private lenders. During fiscal year 

2004, FHA insured 892,591 mortgages, representing $107.7 billion in singlefamily mortgage insurance. The insurance program is supported by the 

Mutual Mortgage Insurance Fund (Fund), which is financed through 

insurance premiums that FHA charges its borrowers.1

 FHA’s mortgage 

insurance program is currently a negative subsidy program, meaning that 

the Fund is self-financed and operates at a profit. 

In 2001 we reported that the Fund had an economic value, or net worth, of 

about $15.8 billion (as of the end of fiscal year 1999) and a capital ratio of 

3.20 percent of the unamortized insurance-in-force,2

 or the initial amount of 

the mortgages.3

 We noted that the minimum required capital ratio of 2 

percent, set by Congress in 1990, appeared sufficient to withstand 

moderately severe economic downturns that could lead to worse-thanexpected loan performance. In 2002, we reported that while loans made 

1

FHA also provides mortgage insurance for certain single-family programs, such as 

condominiums and home equity conversion mortgages, through its General and Special Risk 

Insurance Fund. The single-family mortgage insurance programs supported by the General 

and Special Risk Insurance Fund represented about 13 percent of all single-family 

mortgages that FHA insured in 2004. The remaining 87 percent were insured through the 

Mutual Mortgage Insurance Fund. 

2

The Omnibus Budget Reconciliation Act of 1990 defined the capital ratio as the ratio of the 

Fund’s capital, or economic net worth (economic value), to its unamortized insurance-inforce. However, the act defined unamortized insurance-in-force as the remaining obligation 

on outstanding mortgages—a definition generally understood to apply to amortized 

insurance-in-force. HUD has calculated the capital ratio using unamortized insurance-inforce as it is generally understood—which is the initial amount of mortgages. 

3

See Mortgage Financing: FHA’s Fund Has Grown, but Options for Drawing on the Fund 

Have Uncertain Outcomes, GAO-01-460 (Washington, D.C.: Feb. 28, 2001).
Page 2 GAO-05-875 Mortgage Financing

during the 1990s were performing much better than loans made in the 

1980s, performance was somewhat weaker for loans originated during the 

latter 1990s than for those originated earlier in the decade.4

 Our analysis 

suggested that changes in FHA’s underwriting procedures and in the 

conventional mortgage market may have increased the overall riskiness of 

FHA’s portfolio, potentially affecting the Fund’s economic value and its 

ability to withstand future economic downturns. Therefore, we cautioned 

against concluding that the Fund could withstand specified economic 

scenarios. In October 2004, FHA estimated that the Fund had an economic 

value of about $22 billion and a capital ratio of 5.5 percent. However, 

because of the uncertainty of these measures and recent declines in loan 

performance, we continue to believe that caution is warranted. 

In recent years, FHA has adjusted its budget estimates to reflect that, while 

not requiring subsidy, the performance of FHA-insured loans and the 

resulting cash flows were not as strong as previously estimated. Higher 

estimated costs caused the program to be less profitable than previously 

estimated. Specifically, as of the end of fiscal year 2003, FHA submitted a 

“reestimate” of $7 billion for the Fund. Given this substantial reestimate of 

program cash flows, you asked us to (1) assess the significance of the $7 

billion reestimate, (2) determine what factors contributed to the $7 billion 

reestimate and the underlying loan performance variables influencing these 

factors, (3) assess how the loan performance variables underlying the 

reestimate could impact future estimates of new loans, and (4) assess what 

the reestimate and the underlying loan performance variables mean for the 

long-term viability of the Fund.

To respond to these objectives, we interviewed officials at FHA and staff 

from the Office of Management and Budget (OMB). We collected and 

analyzed budget data on FHA and comparable loan guarantee programs at 

the Department of Veterans Affairs (VA), and Department of Agriculture 

(USDA) to determine the significance of FHA’s $7 billion credit subsidy 

reestimate for the Fund. We interviewed FHA officials and FHA contractors 

and collected and analyzed their written information and data to determine 

the main factors contributing to the reestimate, the underlying loan 

performance variables influencing these factors, and the likelihood these 

variables could impact future estimates. We also analyzed FHA and other 

data on new loan products and home mortgage industry trends to assess 

4

See Mortgage Financing: Changes in the Performance of FHA-Insured Loans, GAO-02-

773 (Washington, D.C.: July 10, 2002).
Page 3 GAO-05-875 Mortgage Financing

what the reestimate and underlying loan performance variables mean for 

the long-term viability of the Fund. Details about our scope and 

methodology appear at the end of this letter.

We conducted our work from November 2004 through July 2005 in 

Washington, D.C., in accordance with generally accepted government 

auditing standards.

Results in Brief The $7 billion credit subsidy reestimate for the Fund was more than twice 

the size of FHA’s other recent reestimates and represented a greater 

proportion of the Fund’s recent cohorts5

 than was the case for the 2003 

reestimates for comparable loan guarantee programs. While the $7 billion 

reestimate is unusually large, the upward direction of FHA’s recent 

reestimates in general is of concern because of the increase in estimated 

cash outflows they represent. Also, FHA’s current credit subsidy estimates 

are, with one exception, higher than the original estimates for all post-1991 

cohorts. 

Three major factors contributed to the $7 billion reestimate: a change in the 

estimated future cash flows of its loans insured through 2003, the 

difference between estimated and actual cash flows occurring during fiscal 

year 2003, and an interest adjustment. The primary loan performance 

variable underlying these factors is unexpectedly high claims. For example, 

in 2003 FHA estimated that most cohorts would experience more claim 

activity over the course of their 30-year terms than it estimated in 2002, 

increasing estimated cash outflows by $2.5 billion. Higher-than-estimated 

prepayments as well as changing assumptions about the impact that FHA’s 

loss mitigation efforts could have on claims are also important variables. 

For example, the revisions to loss mitigation assumptions increased 

estimated cash outflows by $1.7 billion. 

The change in expected claims underlying the $7 billion reestimate will 

likely affect credit subsidy estimates for future loan cohorts, but the effect 

of prepayments is less certain. Several recent policy changes and trends 

may help explain the increase in claims, including changes to underwriting 

guidelines, competition from the private sector, and an increase in the use 

5

A cohort includes those direct loans or loan guarantees of a program for which a subsidy 

appropriation is provided in a given year even if the loans are not disbursed until subsequent 

years. 
Page 4 GAO-05-875 Mortgage Financing

of down payment assistance. It appears that these policy changes and 

trends will continue to impact claims, and thus they will likely continue to 

add risk to FHA’s portfolio. Prepayment rates increased significantly prior 

to the 2003 reestimate, but it is less likely that the same conditions that 

caused the surge in prepayments early in the decade will be repeated. The 

revisions to loss mitigation assumptions will also affect future estimates of 

subsidy by no longer artificially reducing claims, though the significance 

may decline. FHA does not intend to use the same assumption again given 

its greater historical experience with loss mitigation. 

Because the loan performance variables underlying the $7 billion 

reestimate will likely persist to varying degrees, they are also likely to 

affect estimates of the Fund’s long-term viability. The capital ratio, a 

measure of the Fund’s long-term viability, has increased in recent years. 

However, if the Fund’s economic value declines or is restated at a lower 

level than previously estimated, because of higher claims, and if the 

insurance-in-force remains steady, because of declining prepayments, then 

the capital ratio will decline. Whether the currently estimated 5.5 percent 

capital ratio or a lower capital ratio is sufficient depends on the scenarios 

the Fund is expected to survive while maintaining the minimum 2 percent 

reserve. Neither Congress nor HUD has established criteria to determine 

how severe a stress the Fund should be able to withstand.

To more reliably estimate program costs, we recommend that the Secretary 

of HUD direct the FHA Commissioner to study and report the impact on the 

forecasting ability of its loan performance models of variables that have 

been found in other studies to influence credit risk, such as payment-toincome ratios, credit scores, and the presence of down payment assistance. 

We also recommend that when changing the definitions of key variables, 

FHA should report the impact of such changes on the forecasting ability of 

its loan performance models. 

Background FHA was established in 1934 under the National Housing Act (P.L. 73-479) 

to broaden homeownership, shore up and protect lending institutions, and 

stimulate employment in the building industry by providing mortgage 

insurance for loans made by private lenders. Generally, borrowers are 

required to purchase single-family mortgage insurance when the value of 

the mortgage is large relative to the price of the house. Together, FHA, VA, 

USDA, and private mortgage insurers provide virtually all of this insurance. 

FHA provides insurance for mortgages that finance the purchase of 
Page 5 GAO-05-875 Mortgage Financing

properties with one to four housing units, often by low-income, minority, 

and first-time homebuyers.

The economic value of the Fund that supports FHA’s guarantees depends 

on the relative size of cash outflows and inflows over time. Cash flows out 

of the Fund from payments associated with claims on defaulted loans and 

refunds of up-front premiums on prepaid mortgages.6

 To cover these 

outflows, FHA receives cash inflows from up-front and annual insurance 

premiums from borrowers and net proceeds from recoveries on defaulted 

loans. If the Fund were to be exhausted, the U.S. Treasury would have to 

cover lenders’ claims directly.

The Fund remained relatively healthy from its inception until the 1980s 

when claims and losses were substantial, primarily because of high 

foreclosure rates in regions experiencing economic stress. These losses 

prompted reforms that were enacted as part of the Omnibus Budget 

Reconciliation Act of 1990 (P.L. 101-508). The reforms were designed to 

place the Fund on an actuarially sound basis and required, among other 

things, that it maintain a capital ratio of 2 percent of the insurance-in-force 

and that an independent contractor conduct an annual actuarial review of 

the Fund to analyze its economic value.

The Federal Credit Reform Act of 1990 (FCRA), enacted as part of the 

Omnibus Budget Reconciliation Act of 1990, reformed budgeting methods 

for federal credit programs, including FHA’s mortgage insurance program. 

As a result of FCRA, OMB requires federal credit agencies to report the 

actual and estimated lifetime cost to the government of their programs in 

their annual budgets. Similarly, federal accounting standards require 

agencies to recognize the estimated lifetime costs of their programs in their 

financial statements. To determine the expected cost of credit programs, 

agencies predict or estimate the future performance of the programs on a 

cohort basis. This cost, known as the subsidy cost, is the net present value7

of estimated payments the government makes less estimated amounts it 

6

FHA refunds a portion of the up-front premium based on the time elapsed since the loan 

was originated and when a borrower prepays or refinances their loan. 

7

Present value is the worth of the future stream of cash inflows and outflows, as if they had 

occurred immediately. In calculating present value, prevailing interest rates provide the 

basis for converting future amounts into their “money now” equivalents. Net present value is 

the present value of estimated future cash inflows minus the present value of estimated 

future cash outflows. 
Page 6 GAO-05-875 Mortgage Financing

receives over the life of the loan or loan guarantee, excluding 

administrative costs. For the Fund, the overall subsidy is currently a 

negative cost, meaning that the present value of cash inflows exceeds cash 

outflows. Outflows include claims paid on foreclosed properties, refunds of 

up-front insurance premiums, and foreclosed property holding costs, while 

inflows include insurance premiums and proceeds from the sale of 

foreclosed properties, over the life of the loan guarantees (fig. 1). 

Figure 1: Calculation of Credit Subsidy for the Fund 

FCRA established a special budgetary accounting system to record the 

budget information necessary to implement credit reform. For loans and 

loan guarantees made during or after fiscal year 1992—the effective date of 

credit reform—federal agencies use program and financing accounts to 

handle credit transactions.8

 The program account is included in budget 

totals, receives separate appropriations for the administrative and subsidy 

costs of a credit program, and records the budget authority and outlays for 

these costs. The program account is used to pay the associated subsidy 

cost to the financing account when a direct or guaranteed loan is 

disbursed. The financing account, which is nonbudgetary,9

 is used to 

collect the subsidy cost from the program account, borrow from Treasury 

to provide financing for loan disbursements, and record the lifetime cash 

flows associated with direct loans or loan guarantees. In 2002, a new 

capital reserve account was established for the Mutual Mortgage Insurance 

8

Liquidating accounts were established to handle credit transactions on a cash basis for precredit reform loans and loan guarantees.

9

Nonbudgetary accounts may appear in the budget document for informational purposes 

but are not included in the budget totals for budget authority or budget outlays.

Present value of estimated

government disbursements

Present value of estimated

receipts and collections

by government – Subsidy

–

=

Claim payments

Premium refunds

Asset holding costs

Insurance premiums

Asset sale proceeds

Start with Subtract Equals

Source: GAO.
Page 7 GAO-05-875 Mortgage Financing

Fund to maintain reserves for the post-1991 cohorts. In 2003 this new 

account started earning interest on Treasury investments, collecting 

negative subsidy and downward reestimates from the financing account, 

and paying upward reestimates.

Agencies are required to reestimate subsidy costs annually to reflect actual 

loan performance and expected changes in estimates of future loan 

performance. Annual estimates of a program’s expected lifetime subsidy 

change from year to year. Beyond changes in estimation methodology, each 

additional year provides more historical data on loan performance that may 

influence estimates of the amount and timing of future claims and 

prepayments. Economic assumptions also change from one year to the 

next, including assumptions on interest rates, unemployment, and home 

prices. Assumptions about the impact of policy changes also can affect 

estimates of subsidy costs—for example, by changing how loans are 

serviced or the treatment of foreclosed properties, which potentially 

influences the timing and amount of losses.

In accordance with the Omnibus Budget Reconciliation Act of 1990, FHA 

contracts with private firms to prepare an annual actuarial review.10 Figure 

2 illustrates the relationship between the actuarial review and the credit 

subsidy reestimate. For the review, the contractors develop econometric 

loan performance models to estimate future claim and prepayment activity 

for the loans FHA insures. The contractors also develop a cash flow model 

through which they run the output of the loan performance models. The 

actuarial cash flow model calculates the net present value of future cash 

flows in and out of the Fund to estimate its economic net worth and capital 

ratio. FHA also uses the actuarial claim and prepayment data with its credit 

subsidy cash flow model to estimate the net present value of future cash 

flows for the budget and the ending balance of the liability for loan 

guarantees in the financial statements. At the end of the fiscal year, FHA 

10From 1989 to 1998, Price Waterhouse (PricewaterhouseCoopers as of 1998) performed the 

actuarial review; from 1999 to 2003, Deloitte & Touche performed the review; in 2004, 

Technical Analysis Center, Inc., was awarded the contract.
Page 8 GAO-05-875 Mortgage Financing

uses a “balances approach” to compare the resources in the financing 

account to the liability for loan guarantees.11 The difference is the credit 

subsidy reestimate. 

Figure 2: Relationship between Actuarial Review and Reestimate

In November 1996, FHA implemented a new loss mitigation program that 

included a range of options to help homeowners who have defaulted on 

their mortgage to either retain their homes or enable FHA to dispose of 

them in ways that reduced the costs of foreclosure. The loss mitigation 

program has five options: (1) special forbearance, or a repayment 

agreement between the lender and borrower to reinstate a loan; (2) loan 

modification, which provides borrowers with a permanent reduction in 

11Current OMB guidance allows agencies to use either the “traditional approach” or the 

“balances approach” to reestimate costs. The traditional approach uses both actual past and 

estimated future cash flows to calculate a revised expected cost. Then the amount of the 

reestimate is based on the change in the expected cost. HUD uses the balances approach, 

which compares the net resources (cash, other assets, and liabilities) in the financing 

account to the total estimated future cash flows. Both approaches yield simular results. 

Figure 2 illustrates the balances approach.

Actuarial model

(Loan performance model)

FHA historical data Economic assumptions

Actuarial cash flow

model

• Historical cash flows

• Assumptions about:

 • loan performance

 • policy changes

Estimate of economic

net worth and capital ratio

Source: GAO.

Credit subsidy cash 

flow model

• Historical cash flows

• Assumptions about:

 • loan performance

 • policy changes

Credit subsidy

budget estimate

Liability for loan guarantee 

in financial statement Financing account

Credit subsidy reestimate

Estimated claim and

prepayment rates
Page 9 GAO-05-875 Mortgage Financing

mortgage payment; (3) partial claim, which enables a borrower to get an 

interest-free loan from HUD to bring their mortgage payments up to date; 

(4) pre-foreclosure sale, which provides borrowers with a transition to 

more affordable housing; and (5) deed-in-lieu of foreclosure, an alternative 

to foreclosure whereby a borrower voluntarily deeds the property to HUD 

and is released from all mortgage obligations.

The $7 Billion 

Reestimate Is 

Significant for Its Size 

and Direction

The $7 billion credit subsidy reestimate for the Fund was more than twice 

the size of other recent FHA reestimates and represented a greater 

proportion of the Fund’s recent cohorts than other 2003 reestimates for 

comparable loan guarantee programs. Both this unusually large reestimate 

and the upward direction of FHA’s recent reestimates are matters for 

concern. Overall, though the Fund still operates at a profit, FHA’s current 

reestimated credit subsidy rates are higher than FHA originally estimated 

for all but one of the 1992 through 2004 cohorts. In comparison, current 

reestimated subsidy rates for VA’s loan guarantee program are lower than 

VA originally estimated for all but one of the 1992 through 2004 cohorts. 

The Reestimate Is Large 

Compared with Other 

Recent Reestimates and 

Programs

The $7 billion reestimate FHA reported in its 2003 financial statements was 

by far the largest reestimate FHA has made in recent years. As figure 3 

illustrates, it was more than twice the size of any other reestimate from 

2000 through 2004, indicating that FHA’s actual and estimated cash flows 

have changed substantially.
Page 10 GAO-05-875 Mortgage Financing

Figure 3: Annual Credit Subsidy Reestimates for the MMI Fund, Fiscal Years 2000-

2004

An alternative way of measuring the magnitude of the reestimate is by 

comparing it with reestimates for comparable loan guarantee programs. 

FHA’s 2003 reestimate was also unusually large compared with reestimates 

for the same year for VA’s and USDA’s single-family loan guarantee 

programs.12 FHA reestimates the credit subsidy separately for each cohort 

of loans that it insures, totaling the separate reestimates into one overall 

reestimate for the fiscal year. Loans that FHA insured in 2001 through 2003 

accounted for $4.5 billion, or 64 percent, of the total $7 billion reestimate. 

The $4.5 billion of the reestimate attributed to these three cohorts of loans 

12Because the age composition of these programs’ portfolios may differ, we selected only the 

three most recent cohorts for our analysis. These three cohorts represented the majority of 

FHA’s loan portfolio in 2003.

2000 2001 2002 2003 2004

Fiscal year

Dollars in billions

Source: GAO analysis of FHA data.

-2

-1

0

1

2

3

4

5

6

7

8
Page 11 GAO-05-875 Mortgage Financing

equaled 1.22 percent of their combined total endorsements.13 As figure 4 

illustrates, this percentage is more than double that of comparable loan 

guarantee programs at VA and USDA. 

Figure 4: Amount of the 2003 Reestimate Attributed to the 2001-2003 Cohorts, as a 

Percentage of the Original Loan Amount, for Single-Family Loan Guarantee 

Programs 

FHA’s Current Reestimated 

Subsidy Rates Are Less 

Favorable Than Its Original 

Estimates 

FHA has estimated negative credit subsidies for the Fund since 1992, when 

credit reform became effective. However, with one exception, current 

reestimated subsidy rates for FHA’s loan guarantees are less favorable than 

originally estimated. Meanwhile, across the country home prices have been 

growing faster and more uniformly since 2000 than they grew during the 

1990s and most of the 1980s. This indicates that very few borrowers would 

have seen their home values decline to the point at which their homes were 

13Figure 4 is based on data from the fiscal year 2006 Federal Credit Supplements, which 

reports $369 billion in Fund loans endorsed (guaranteed) to date for the fiscal year 2001-

2003 cohorts. According to the Federal Credit Supplement, 100 percent of Fund loan 

guarantees are endorsed in the first year.

0.0

.3

.6

.9

1.2

1.5

FHA VA USDA

Percentage

Source: GAO analysis of Federal Credit Supplements, fiscal years 2005-2006.
Page 12 GAO-05-875 Mortgage Financing

worth less than their mortgage balances, putting them at a greater risk of 

foreclosure and causing subsidy rates to worsen. In keeping with the trend 

of increasing home prices, current reestimated rates for VA’s program are 

more favorable than originally estimated. As shown in figure 5, the original 

and current subsidy cost estimates for FHA’s 1992 through 2004 cohorts 

were negative, meaning FHA estimated total cash inflows to be greater 

than outflows over the life of each cohort. FHA’s most recent reestimates 

indicate that all but the 1992 cohort will be less profitable than originally 

estimated, though FHA is not estimating that these cohorts will have 

overall negative cash flows. In comparison, the original subsidy estimates 

for VA’s 1992 through 2004 cohorts did indicate negative cash flows, 

meaning VA estimated that the present value of total cash outflows would 

exceed inflows over the life of each cohort. With the exception of one 

cohort, VA’s reestimated subsidy costs are all lower than originally 

estimated, indicating that VA currently estimates that its cohorts will 

perform better than originally expected. However, VA estimates that 

several cohorts will continue to have overall negative cash flows. 
Page 13 GAO-05-875 Mortgage Financing

Figure 5: Original Estimated Credit Subsidy Rates and Most Recent Reestimated Rates for the FHA and VA Loan Guarantee 

Programs, 1992-2004 Cohorts 

The $7 Billion 

Reestimate Primarily 

Reflects Higher-ThanEstimated Claims 

The $7 billion reestimate represents the changes in FHA’s estimates of 

future loan performance and the change in cash flows stemming from the 

difference between estimated and actual loan performance during fiscal 

year 2003. These changes primarily reflect the impact of higher-thanestimated claims, but also reflect the impact of higher-than-estimated 

prepayments and a technical change in FHA’s calculation of claims. The 

reestimate also represents an interest adjustment (fig. 6).

-3.5

-3.0

-2.5

-2.0

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

-3.5

-3.0

-2.5

-2.0

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

1992 1994 1996 1998 2000 2002 2004

Cohort

1992 1994 1996 1998 2000 2002 2004

Cohort

Rates Rates

Source: GAO analysis of Federal Credit Supplements, fiscal years 2005-2006.

FY2005 reestimate rate

Original estimate rate

Subsidy required?

No

Yes

FHA VA
Page 14 GAO-05-875 Mortgage Financing

Figure 6: Primary Factors Contributing to the Fiscal Year 2003 MMI Credit Subsidy 

Reestimate

Three Main Factors 

Contributed to the 

Reestimate

The largest contributing factor—55 percent—was the $3.9 billion 

difference between FHA’s fiscal year 2003 estimates of the net present 

value of future cash flows and the estimates it made one year earlier. As 

previously discussed, FHA estimates the value of expected future cash 

flows each year by calculating the present value of anticipated cash 

outflows, such as claim payments and premium refunds, and subtracting 

inflows, such as insurance premiums and proceeds from the sale of 

foreclosed properties. In 2002, FHA estimated that the net present value of 

future cash flows for the 1992 through 2002 cohorts was a positive $1.9 

billion, meaning that FHA expected cash inflows to exceed cash outflows 

on a net present value basis. In 2003, FHA estimated that the net present 

value of future cash flows for the 1992 through 2003 cohorts was negative 

$2 billion, meaning that FHA expected future cash outflows to exceed 

future cash inflows.14 As figure 7 illustrates, the difference between the two 

estimates is $3.9 billion.

$2.1

$3.9

$1.1 Interest adjustment

Change in estimated future cash flows

Difference between estimated and actual

cash flows occurring during FY 2003

Source: GAO analysis of FHA data.

Dollars in billions

14Lifetime cash flow estimates continued to be positive, primarily because of positive cash 

flows occurring earlier in the life of the cohort.
Page 15 GAO-05-875 Mortgage Financing

Figure 7: Change in Future Cash Flow Estimates for the Fund from Fiscal Year 2002 

to Fiscal Year 2003

The second factor contributing to the $7 billion reestimate—30 percent—

was the $2.1 billion difference between estimated and actual cash flows 

occurring during fiscal year 2003. This amount indicates that FHA had $2.1 

billion less in cash inflows during 2003 than it had estimated it would have 

a year earlier. The final factor contributing to the reestimate (15 percent) 

was the $1.1 billion of interest on the reestimate. OMB guidance requires 

agencies to calculate an interest adjustment on the reestimate.15 In FHA’s 

case, the interest adjustment increased the total reestimate by $1.1 billion. 

15Circular No. A-11, Part 5: Federal Credit Programs, Office of Management and Budget, 

June 2002.

-2.0

-1.5

-1.0

-.5

0

.5

1.0

1.5

2.0

2002 2003

Dollars in billions

Year

$3.9B

Source: GAO analysis of FHA financial statements, fiscal years 2002-2003.
Page 16 GAO-05-875 Mortgage Financing

A Change in Estimated 

Claims Was the Primary 

Loan Performance Variable 

Behind the $3.9 Billion 

Change in Estimated Future 

Cash Flows

Approximately $2.7 billion (70 percent) of the $3.9 billion net change in 

FHA’s estimate of future cash flows stems from changes in FHA’s estimates 

of claims and, to a lesser extent, prepayments (fig. 8). That is, FHA changed 

its estimate of future loan performance based on its observation of actual 

loan performance during 2003 and revised economic assumptions. In 2003 

FHA estimated that, except for the 1993 and 1994 loan cohorts, all cohorts 

would experience more claim activity over the course of their 30-year 

terms—and thus increase FHA’s outflows—than estimated in 2002. The 

cash flows associated with these claims increased estimated cash outflows 

by $2.5 billion, accounting for 92 percent of the $2.7 billion. Increases in the 

expected level of prepayments also affected FHA’s estimate of future cash 

flows. FHA estimated in 2003 that about half of the cohorts would 

experience more prepayment activity than it had estimated in 2002. 

Because of the increase in estimated prepayments, FHA expected to collect 

less premium income and to pay out premium refunds more often, reducing 

estimated cash inflows by about $200 million and accounting for 8 percent 

of the $2.7 billion.

Figure 8: Variables Contributing to the $3.9 Billion Change in Estimated Cash Flows

Another major variable that contributed to the $3.9 billion change in 

estimated future cash flows was a technical change in FHA’s calculation of 

$3.9

-3.0 -2.5 -2.0 -1.5 -1.0 -0.5 0 0.5 1.0

New loans

originating

in FY2003

Dollars in billions

Dollars in billions

Source: GAO analysis of FHA data.

Change in

conditional claim

and prepayment rates

Removal of loss

mitigation adjustment

Other
Page 17 GAO-05-875 Mortgage Financing

claims that increased the reestimate by $1.7 billion. Specifically, for 

estimates prepared during fiscal years 2001 and 2002, FHA used a cash flow 

assumption—a loss mitigation adjustment factor—to reduce the claim 

rates predicted by the actuarial review and used in the subsidy cash flow 

model. FHA had been using this factor in the belief that the historical data 

used to estimate claim rates did not include enough years under the loss 

mitigation program to adequately reflect the impact of this program—that 

is, an expected decline in claims. However, FHA officials stated that in 

fiscal year 2003 FHA removed the factor because the historical loan 

performance data, which by then included more years of experience with 

the loss mitigation program, sufficiently reflected the program’s impact. In 

addition, FHA noted that its actuarial review was underestimating claims, 

making it counterproductive to use a loss mitigation adjustment factor that 

further reduced the actuarial claim predictions. Removing the loss 

mitigation adjustment factor from the 2003 subsidy cash flow model 

increased the reestimate by a total of $1.7 billion, with the greatest increase 

related to loans made in the most recent years (fig. 9). 

Figure 9: Increase in Estimated Cash Outflows from Removing the Loss Mitigation Adjustment Factor, 1992-2003 Cohorts

0

100

200

300

400

500

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

Cohort

Dollars in millions

Source: GAO analysis of FHA data.
Page 18 GAO-05-875 Mortgage Financing

The above increases in estimated cash outflows are offset by the estimated 

additional cash inflows from new loans that FHA insured in 2003. 

Specifically, FHA estimated that for loans originating during 2003, future 

inflows would exceed future outflows by $1 billion. Several other factors 

had much smaller positive or negative impacts on future cash flows. The 

net impact of these other factors contributed $500 million to the 

reestimate.

Higher-Than-Estimated 

Claims and Prepayments 

Contributed to the $2.1 

Billion Difference between 

Estimated and Actual Cash 

Flows Occurring during 

2003

The remaining part of the $7 billion—$2.1 billion—represents the 

difference between estimated and actual cash flows occurring during fiscal 

year 2003. Certain elements of the difference relate to the 1992 through 

2002 cohorts, including $330 million in underestimated claims and 

recoveries on claims and $1 billion in overestimated net fees (insurance 

premium receipts less premium refunds). The remaining $700 million 

relates to cash flow differences associated with the 2003 cohort. 

Our analysis of loan performance data found that claims and prepayments 

occurring during 2003 exceeded FHA’s estimates. As figure 10 illustrates, 

actual claim activity in fiscal year 2003 exceeded estimated claim activity 

for 2003—by twice as much in some cases—for the majority of loan 

cohorts. For example, FHA estimated that about 1.6 percent of all the loans 

it insured in 2000 that were in the portfolio at the beginning of 2003 would 

result in a claim during 2003. However, 4 percent of such loans actually 

ended in a claim in 2003. Actual prepayment activity exceeded estimated 

prepayment activity for all loan cohorts. For example, FHA estimated that 

14 percent of all the loans it insured in 2001 that were still in the portfolio at 

the beginning of 2003 would prepay during 2003. However, more than 40 

percent of such loans actually prepaid during 2003. Because of the 

additional claims it paid, up-front premiums it refunded, and the annual 

premiums it lost, FHA’s cash inflows for the year declined and resulted in a 

$2.1 billion upward adjustment of the Fund’s credit subsidy. 
Page 19 GAO-05-875 Mortgage Financing

Figure 10: Actual Versus Estimated Conditional Claim and Prepayment Rates for Fiscal Year 2003, 1993-2003 Cohorts 

Note: The 2003 estimate data are from the 2002 actuarial review. The 2003 actual data are from the 

2004 actuarial review.

The Loan Performance 

Variables Underlying 

the $7 Billion 

Reestimate Will Likely 

Affect Future Credit 

Subsidy Estimates, but 

Are Being Addressed 

The events behind the change in expected claims underlying the $7 billion 

reestimate will likely continue to affect future credit subsidy estimates, 

though prepayments may have a smaller effect. The one-time modeling 

change caused by removing the loss mitigation adjustment factor should 

also continue to have an effect on future estimates, though its significance 

may decline. 

0

10

20

30

40

50

0

1

2

3

4

5

1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

Cohort Cohort

Percentage Percentage

Claim rate Prepayment rate

Actual

Estimate

Source: GAO analysis of FHA data.
Page 20 GAO-05-875 Mortgage Financing

Higher Claims Will Likely 

Continue, but FHA Is Taking 

Steps to Improve Its 

Estimates 

As we have seen, the $7 billion reestimate was largely due to higher-thanestimated claims. Several recent events may help explain this increase, 

including changes to underwriting guidelines, competition from the private 

sector, and an increase in the use of down payment assistance. FHA has 

taken some steps to tighten underwriting and to better estimate claims, but 

it is not clear that these steps will be sufficient to reverse recent increases 

in claims or significantly improve future estimates of claims. 

According to FHA, revised underwriting guidelines issued in 1995 

represented significant changes that would enhance home-buying 

opportunities for a substantial number of borrowers. These changes made 

it easier for borrowers to qualify for loans and for higher loan amounts. In 

previous work, we noted that these underwriting changes may partly 

explain the higher claim rates of the late 1990s.16 FHA officials told us that 

since making these changes, FHA’s share of first-time homebuyers has 

increased by more than 30 percent, and its share of minority homebuyers 

has increased by 40 percent. FHA officials noted that these borrowers are 

more susceptible to changes in economic conditions and, thus, may be 

more likely to default on their mortgages. The officials also noted that, 

while this change in the composition of their borrowers had resulted in a 

one-time increase in claims, claims have leveled off and should remain 

steady at the new level. 

To evaluate the impact of the underwriting changes, FHA introduced a 

simple variable into its annual actuarial models that captures whether or 

not a loan was made after fiscal year 1995. This variable is intended to 

capture the one-time impact of the 1995 underwriting changes, not to 

capture any adverse trends that might result from changes that accrue over 

time, such as increasing competition from the private sector or the growing 

prevalence of down payment assistance. If there are adverse trends, as 

opposed to only one-time changes, the model will not fully capture them 

and, therefore, will likely underestimate future claims. For example, if 

loans with down payment assistance have higher claims and if this category 

of loans grows over time, then the claim model will consistently 

underestimate claims and the model’s error will worsen with time.

16See Mortgage Financing: Changes in the Performance of FHA-Insured Loans, GAO-02-

773 (Washington, D.C.: July 10, 2002).
Page 21 GAO-05-875 Mortgage Financing

In 2002, we reported that the performance of loans insured during the late 

1990s was weaker than the performance of loans originated earlier in the 

decade. We noted then that increased competition and changes in the 

conventional mortgage market could result in FHA’s insuring relatively 

more loans that carried greater risk. These issues continue to be 

significant. In recent years, private mortgage insurers and conventional 

mortgage lenders have increasingly offered products that compete with 

FHA for homebuyers who are borrowing more than 95 percent of the value 

of their home. In addition, automated underwriting systems and creditscoring analytic software are believed to be able to more effectively 

distinguish low-risk loans for expedited processing. If, by selectively 

offering these low down payment loans to better risk borrowers, 

conventional mortgage lenders and private mortgage insurers were able to 

attract lower-risk borrowers that would have traditionally sought FHAinsured loans, recent FHA-insured loans with down payments of less than 5 

percent may be more risky on average than they have been historically. 

A growing trend that has raised some concerns and may increase claims is 

the use of seller-funded down payment assistance for mortgages insured by 

FHA. FHA requires borrowers to make a 3 percent contribution toward the 

purchase of the property, but that contribution can come indirectly through 

borrowers’ relatives or nonprofit organizations. Although FHA does not 

permit down payment funds to come directly or indirectly from sellers, it 

does permit nonprofits that receive contributions from sellers to provide 

down payment assistance to homebuyers. Many conventional mortgage 

products also permit down payment funds to come from sources other than 

the borrower; however, the terms of these mortgage products generally 

stipulate that such funds cannot come either directly or indirectly from an 

interested or seller-related party. A HUD Office of the Inspector General 

evaluation of FHA-insured loans found that loans with down payment 

assistance from seller-funded nonprofits had a greater risk of default and 

that the percentage of FHA-insured loans with down payment assistance 

from seller-funded nonprofits was growing at an increasing rate. As of July 

2005, FHA had not revised its policies regarding acceptable sources of 

down payment assistance or imposed additional underwriting 

requirements on borrowers who obtained down payment assistance from 

seller-funded nonprofits. At your request, we are currently conducting a 

study on down payment assistance and evaluating the performance of 

these loans. 

A program assessment jointly prepared by OMB and FHA and included 

with the 2006 President’s Budget noted that FHA’s loan performance model 
Page 22 GAO-05-875 Mortgage Financing

is neither accurate nor reliable because it consistently under predicts 

claims. For the 2004 actuarial review, FHA worked with a new contractor 

to redesign and respecify its loan performance models. FHA continues to 

work on improving its new models so that it can more accurately and 

reliably predict claims and prepayments. Several factors distinguish the 

new models from those used previously. First, the new models use 

quarterly data, while the previous models used annual data. In addition, the 

new models explicitly address the time lag in claims and the implications of 

the time lag for prepayments,17 and allow for a closer correspondence 

between the actual and predicted time pattern of claim and prepayment 

rates. These changes may improve the models’ ability to predict the 

number and timing of claims and prepayments. Nonetheless, for the 2004 

actuarial review FHA had to adjust model estimates of claims that will 

occur in fiscal years 2004 through 2006 for all loan cohorts. By the third 

quarter of fiscal year 2004, while FHA was preparing the 2004 actuarial 

review, FHA realized that actual claims for the year were outpacing the 

amount of estimated claims based on data from the first half of 2004 and 

earlier. FHA and its contractors assumed this difference was caused by a 

temporary deviation and adjusted the model’s projected claim rates to 

match the recorded claim counts. Specifically, FHA applied a claim rate 

multiplier to increase estimated claim rates by 50 percent for all cohorts for 

fiscal years 2004 and 2005 and by 25 percent for fiscal year 2006. Because 

FHA was responding to what it believed to be a temporary deviation, it did 

not apply the multiplier to any years after 2006.

The new models also eliminated some explanatory variables, such as 

unemployment rates and payment-to-income ratios, and altered the 

definitions of other key variables. For example, the previous models 

assumed that borrowers who passed up profitable refinancing 

opportunities would experience permanently higher claim rates—

sometimes referred to as burnout—while the new models assume that 

higher claim rates are a temporary phenomenon that will last only 2 years. 

In addition, neither model incorporates certain variables that have been 

found to be important in assessing credit risk, such as credit scores and the 

source of down payments. FHA officials are researching these variables 

currently. FHA officials told us they will not be including credit scores for 

17A loan may be seriously delinquent for several quarters before that delinquency is 

resolved. Because it is difficult for a borrower with a delinquent loan to obtain a new loan in 

order to refinance, several quarters may pass during which time a loan has a high probability 

of resulting in a claim, because it is delinquent, and has a low probability of resulting in a 

prepayment, because the borrower cannot refinance using conventional channels.
Page 23 GAO-05-875 Mortgage Financing

the 2005 actuarial review, though they are considering ways to account for 

credit scores in the 2006 actuarial model. For the 2005 model, FHA made 

adjustments for the source of down payments by adjusting the loan-tovalue ratio for seller-funded down payment assistance. On balance, it is not 

clear that these changes to the actuarial models will permit FHA to more 

reliably estimate claim (or prepayment) activity. In fact, the $7 billion 

reestimate was followed a year later with an upward reestimate of $2.3 

billion for fiscal year 2004.

Prepayments Had a Smaller 

Impact on the $7 Billion 

Reestimate and Their 

Impact on Future Credit 

Subsidy Estimates Is 

Uncertain 

While claims may have been the largest driver behind the reestimate, 

prepayments also had an impact. As we discussed above, FHA experienced 

a significant increase in prepayment activity from 2001 through 2004. As 

figure 11 illustrates, between 2000 and 2001, the dollar amount of 

prepayments more than doubled, rising from $37 billion to $82 billion. 

Prepayments reached a total of $190 billion in 2003 and decreased slightly 

to $123 billion in 2004. 

Figure 11: Amount of FHA Prepayments during Fiscal Years 2000-2004 

0

50

100

150

200

2000 2001 2002 2003 2004

Dollars in billions

Fiscal year

Source: GAO analysis of FHA data.
Page 24 GAO-05-875 Mortgage Financing

FHA experienced surges of prepayment activity in the mid-1980s and early 

1990s. All three of these time periods coincided with periods of declining 

interest rates, though the rates of prepayment are highest in 2003, when 

mortgage interest rates reached a 30-year low. As of July 2005, mortgage 

interest rates had declined even further from their 2004 level, though by a 

much smaller amount compared with the 2002-2003 decline. Because it is 

difficult to project future interest rates, it is difficult to project their impact 

on future prepayment activity. As we noted previously, house prices have 

risen faster in the first part of the decade than they did in the 1990s or most 

of the 1980s. Rapid appreciation in housing prices permits borrowers to 

refinance using conventional loans, however, it is uncertain that the 

upward trend in appreciation will continue.

One-time Removal of Loss 

Mitigation Factor Should 

Continue to Affect Future 

Estimates

The removal of the loss mitigation adjustment factor also had a notable 

impact, affecting the cash flow model’s calculation of claims and thus 

contributing $1.7 billion to the reestimate. FHA does not intend to use this 

adjustment again given its greater historical experience with loss 

mitigation. That is, FHA expects that the historical data on which loan 

performance estimates are based will include and reflect more years of 

experience with the loss mitigation program. However, this change in the 

assumptions used in estimating loan performance will affect the estimated 

subsidy costs of new cohorts because estimates of future cohorts will not 

include the loss mitigation adjustment factor, though the significance of no 

longer making this adjustment may decline over time. That is, as FHA 

estimates of loan performance include more historical experience with loss 

mitigation, any positive effect loss mitigation may have would be reflected 

in the loan performance variables.

Recent Policy Changes May 

Affect Claims and 

Prepayments 

In recent years, FHA has introduced several policy changes that may affect 

claim activity. Since 2000, FHA has loosened some underwriting 

procedures to encourage homeownership. For example, FHA increased the 

amount of the mortgage payment it will permit relative to borrower 

income. Specifically, in April 2005, FHA increased its maximum paymentto-income ratio from 29 percent to 31 percent and its debt-to-income ratio 
Page 25 GAO-05-875 Mortgage Financing

from 41 percent to 43 percent.18 By increasing these qualifying ratios, FHA 

could offer mortgage insurance to borrowers who would not have 

otherwise been approved for a loan. However, borrowers who devote more 

of their income to their mortgage payments could have trouble meeting 

their payments if they encounter financial trouble. FHA made these 

changes in response to recent federal tax cuts, which increased potential 

borrowers’ buying power. Therefore, FHA noted, the changes should 

broaden eligibility without increasing the risk of default.

FHA has also taken steps to tighten some underwriting guidelines. For 

example, in 2000 it changed its policies on gift transfers and the types of 

assets that may be considered for cash reserves. FHA now requires more 

documentation for gift transfers to ensure that the funds are applied 

toward the borrower’s down payment and come from sources with no 

interest in the sale of the property. However, in a recent review of FHA’s 

new mortgage loan products, we found that FHA does permit nonprofits 

that receive contributions from sellers to provide down payment assistance 

to borrowers. 19 FHA also now requires lenders to ensure that borrowers’ 

assets, such as retirement accounts, can be easily converted into cash 

before applying them toward cash reserves. This policy change requires 

that lenders account for any applicable taxes or withdrawal penalties that 

borrowers may incur when converting their assets to cash, potentially 

reducing the amount of cash available to these borrowers. In early 2004 

FHA introduced the Technology Open to Approved Lenders Mortgage 

Scorecard. This tool is used in conjunction with automated underwriting 

systems to evaluate the credit risk of borrowers who apply for FHA insured 

loans. The introduction of the new mortgage scorecard may help FHA and 

lenders more efficiently and effectively identify and evaluate credit risk 

and, therefore, may help reduce claims. 

FHA has taken measures to enhance the effectiveness of its loss mitigation 

program. In 2002, FHA modified some of its loss mitigation options to give 

18The payment-to-income ratio, also referred to as the housing-expense-to-income ratio, 

examines a borrower’s expected monthly housing expenses as a percentage of the 

borrower’s monthly income. The debt-to-income ratio looks at a borrower’s expected 

monthly housing expenses plus long-term debt as a percentage of the borrower’s monthly 

income. FHA limits the monthly mortgage payment to no more than 31 percent of monthly 

gross income (before taxes) and limits the mortgage payment combined with other debts to 

no more than 43 percent of income.

19See Mortgage Financing: Actions Needed to Help FHA Manage Risks from New Mortgage 

Loan Products, GAO-05-194 (Washington, D.C.: Feb. 11, 2005).
Page 26 GAO-05-875 Mortgage Financing

lenders more flexibility to assist borrowers who are unable to make their 

monthly payments, help avoid or reduce the time and expense of the 

foreclosure process, and enable borrowers to obtain credit again in the 

future. FHA believes that the introduction of loss mitigation and changes 

made since the program’s implementation should reduce losses it incurs 

when borrowers default on their loans. FHA also introduced the 

Accelerated Claim Disposition demonstration program in 2002 (referred to 

as the “601” program) to streamline the claim and property disposition 

processes with the goal of reducing losses to the Fund.

FHA has also made some recent policy changes that may affect prepayment 

activity. For example, FHA changed its up-front mortgage insurance 

premium rules for mortgages endorsed after December 2004. In the past, 

FHA refunded a percentage of the up-front premium to borrowers when 

they prepaid their loans, typically by refinancing or selling their homes. 

Borrowers were entitled to this refund even when they refinanced outside 

of FHA. For new loans guaranteed after December 2004, FHA will no longer 

refund a percentage of the up-front premium to borrowers who refinance 

their mortgages outside of FHA. FHA also shortened the refund schedule of 

the up-front premium from 5 to 3 years. These changes could encourage 

borrowers to refinance their mortgage with another FHA-insured loan, 

while reducing the amount of refunds that FHA pays to borrowers who 

refinance or sell their homes. However, these changes may also discourage 

some borrowers from choosing to finance their home purchases with an 

FHA-insured mortgage. FHA predicts that the changes to its up-front 

premium rules will increase cash flows by about $168 million annually.

The Loan Performance 

Variables Underlying 

the Reestimate Could 

Affect Estimates of the 

Fund’s Long-Term 

Viability 

The effect of recent trends on the loan performance variables underlying 

the $7 billion reestimate will likely persist to varying degrees and therefore 

affect estimates of the Fund’s long-term viability. The capital ratio, a 

measure of the Fund’s long-term viability, has increased in recent years. 

However, should the economic value decline or be restated as lower than 

previously estimated (due to higher-than-estimated claims), and should the 

insurance-in-force remain steady (due to declining prepayments), then the 

capital ratio will decline. Whether the currently estimated 5.5 percent 

capital ratio or a lower capital ratio is sufficient to meet federal 

requirements depends on what conditions the Fund is expected to survive 

while maintaining the minimum 2 percent reserve. Neither the Congress 

nor HUD has established criteria to determine how severe of a stress the 

Fund should be able to withstand. 
Page 27 GAO-05-875 Mortgage Financing

The Fund is required to maintain a minimum capital ratio (a measure of its 

long-term viability) of 2 percent of the insurance-in-force. As figure 12 

illustrates, the Fund’s capital ratio has been well above 3 percent and rising 

since fiscal year 2000. The economic value of the Fund—the sum of 

existing capital plus the net present value of expected future cash flows 

from existing cohorts—has also been rising for a number of years, though it 

declined in fiscal year 2004. However, the Fund’s insurance-in-force 

declined 20 percent between 2002 and 2004 in response to increased claim 

and prepayment activity during those years and a decline in new loan 

originations. As the capital ratio is the Fund’s economic value divided by its 

insurance-in-force, the capital ratio only increased because the decrease in 

the insurance-in-force was proportionately larger than the decrease in the 

economic value of the Fund. 

Figure 12: Capital Ratio Versus Economic Value of the MMI Fund, Fiscal Years 2000-

2004

0

5

10

15

20

25

2000 2001 2002 2003 2004

0

1

2

3

4

5

6

Dollars in billions Capital ratio (percentage)

Fiscal year

Source: GAO analysis of FHA data.

Capital ratio

Economic value of MMI fund
Page 28 GAO-05-875 Mortgage Financing

If the economic value declines or is restated at a lower level than 

previously estimated and if the insurance-in-force does not decline (for 

example, due to substantial prepayments), then the capital ratio will 

decline. As we noted, the events that help explain the increase in claims 

underlying the $7 billion reestimate—such as changes in underwriting 

guidelines, competition from the private sector, and an increase in the use 

of down payment assistance—do not appear to be one-time events and 

likely will continue to add risk to FHA’s portfolio. For example, the 

borrowers FHA has attracted since introducing its 1995 underwriting 

changes are more susceptible to economic downturns and, therefore, more 

likely to default on their mortgages. Further, despite HUD’s Office of the 

Inspector General finding that loans with down payment assistance from 

seller-funded nonprofits have a greater risk of default, the percentage of 

FHA-insured loans with down payment assistance from seller-funded 

nonprofits is growing at an increasing rate. 

FHA has introduced several policy changes that may help reduce claim 

activity, such as requiring lenders to ensure that borrowers’ assets can be 

easily converted into cash before applying them toward cash reserves and 

introducing the TOTAL Mortgage Scorecard to evaluate the credit risk of 

borrowers who apply for FHA-insured loans. Despite these changes, it 

seems likely that FHA’s higher level of claims will continue. Higher claim 

rates imply a lower estimated economic value of the Fund.

While prepayment rates increased significantly in the early part of the 

decade, it is less likely that the same conditions that caused the surge in 

prepayments will be repeated, reducing the impact that prepayments may 

have on reducing the insurance-in-force. As we noted above, the three 

surges of prepayment activity that FHA experienced coincided with 

periods of declining interest rates. The rates of prepayment were highest in 

2003, when mortgage interest rates reached a 30-year low. As figure 13 

illustrates, the Fund’s amortized insurance-in-force also declined in fiscal 

years 2003 and 2004 as prepaying borrowers left the portfolio. Mortgage 

interest rates have been even lower in the spring and early summer of 2005. 

Even if prepayments slow, should claim activity continue to be higher and 

FHA be unable to compete for new borrowers, the Fund’s insurance-inforce may shrink. But if the net effect is that the size of the portfolio 

stabilizes or declines only slightly, higher claim activity could result in a 

lower capital ratio.
Page 29 GAO-05-875 Mortgage Financing

Figure 13: Amortized Insurance-In-Force, Fiscal Years 2000-2004 

The long-term viability of the Fund depends on both the impact that the 

underlying change in loan performance may have on the capital ratio and 

the conditions or scenarios under which Congress expects the Fund to 

maintain its 2 percent minimum reserve. A lower capital ratio would mean 

that the Fund is less able to withstand adverse economic conditions. As 

figure 14 illustrates, the Fund’s capital ratio has been well above the 2 

percent minimum and rising since fiscal year 2000. But whether the 

currently estimated 5.5 percent capital ratio or a lower capital ratio is 

sufficient depends on what conditions the Fund is expected to survive 

while maintaining the minimum 2 percent reserve.

0

50

100

150

200

250

300

350

400

450

500

Amortized insurance-in-force (dollars in billions)

Fiscal year

Source: GAO analysis of FHA data.

2000 2001 2002 2003 2004
Page 30 GAO-05-875 Mortgage Financing

Figure 14: Minimum Required Capital Ratio Versus Actual Capital Ratio

Because economic downturns put downward pressure on house prices and 

incomes, they can stress FHA’s ability to meet its obligations. Thus, it is 

reasonable that measures of the financial soundness of the Fund would be 

based on tests of the Fund’s ability to withstand recent recessions or 

regional economic downturns. The 2004 actuarial review examines four 

stress scenarios, none of which are particularly severe. Three of the 4 

stress tests examine one source of stress at a time, while one examines two 

stresses simultaneously. A severe stress test would examine the possibility 

of multiple stresses occurring simultaneously, such as a decrease in house 

prices coupled with a decrease in recoveries on the sale of foreclosed 

homes and an increase in the dispersion of house price changes across 

multiple regions. Neither Congress nor HUD has established criteria to 

determine how severe a stress the Fund should be able to withstand. While 

the Fund continues to maintain a capital ratio above the required minimum, 

we have recommended in the past that HUD develop criteria that specify 

the economic conditions the Fund should be able to withstand and the 

capital ratios currently consistent with those criteria. We also 

recommended that the annual actuarial analysis give more attention to 

tests of the Fund’s ability to withstand appropriate stresses. Finally, we 

0

1

2

3

4

5

6

2000 2001 2002 2003 2004

Capital ratio (percentage)

Fiscal year

Source: GAO analysis of FHA data.

Required minimum capital ratio
Page 31 GAO-05-875 Mortgage Financing

recommended that HUD develop better tools for assessing the impact that 

policy changes may have on the volume and riskiness of the loans that FHA 

insures.20

Conclusions There are two important ways that FHA can manage risks to the Fund and 

its ability to withstand economic downturns. First, FHA needs to be able to 

reliably estimate program costs. To do so, FHA needs to understand the 

factors that influence loan performance and, considering this information, 

accurately estimate future claims and prepayments and the resulting cash 

flows. Without better estimates of loan performance, FHA cannot 

reasonably estimate the economic net worth of the Fund or its capital ratio. 

Second, even if FHA can better estimate program costs, it still needs to 

know what conditions the Fund is expected to endure while maintaining 

the minimum 2 percent capital reserve. 

Recommendations for 

Executive Action

To more reliably estimate program costs, the Secretary of HUD should 

direct the FHA Commissioner to study and report in the annual actuarial 

review the impact of variables that have been found in other studies to 

influence credit risk, such as payment-to-income ratios, credit scores, and 

the presence of down payment assistance, on the forecasting ability of the 

loan performance models used in FHA’s actuarial reviews of the Fund. FHA 

also should report in its annual actuarial review the impact of any changes 

it makes to key variables, such as the burnout variable, on the forecasting 

ability of the loan performance models.

Agency Comments and 

Our Evaluation

We provided HUD, VA, and OMB with a draft of this report for their review 

and comment. We received written comments from HUD, which are 

reprinted in appendix III. We also received technical comments from HUD, 

which have been incorporated where appropriate. VA and OMB did not 

have comments on the draft.

HUD stated that it agrees with GAO’s overall finding that higher than 

projected claims were a significant variable underlying the $7 billion 

reestimate, and that its 1995 underwriting changes help explain the 

20See Mortgage Financing: FHA’s Fund Has Grown, but Options for Drawing on the Fund 

Have Uncertain Outcomes, GAO-01-460 (Washington, D.C.: Feb. 28, 2001).
Page 32 GAO-05-875 Mortgage Financing

increase in claims. HUD also agreed with our description of the steps it has 

taken to better estimate claims in its recent actuarial reviews.

HUD raised a concern that our first recommendation would require FHA to 

direct its actuarial contractor to include certain variables in its loan 

performance models, and that this would compromise the requirement for 

an independent actuarial study of the Fund. In response, we recommend 

instead that FHA study and report in the annual actuarial review the impact 

of such variables on the forecasting ability of the loan performance models. 

HUD further noted that its contractor is actively considering the specific 

variables that we had recommended FHA include in its annual actuarial 

review. 

In response to our second recommendation that FHA report in its actuarial 

review the impact of any changes it makes to key variables on the 

forecasting ability of its loan performance models, HUD noted that the 

actuarial reviews and appendices contain full documentation of the models 

and justifications for the selection of the included variables and their 

definitions. However, we found, for example, that the 2004 actuarial review 

did not fully document or justify the change in the definition of the burnout 

variable. Specifically, the 2004 actuarial review contained only a short 

statement regarding this change, with no accompanying analysis of its 

impact on the forecasting ability of FHA’s loan performance models. We 

therefore continue to recommend that the annual actuarial review include 

analyses of the impact of changes made to key variables on the forecasting 

ability of the loan performance models.

As agreed with your office, unless you publicly announce the contents of 

this report earlier, we plan no further distribution until 30 days from the 

report date. At that time, we will send copies of this report to interested 

Members of Congress and congressional committees. We will also send 

copies to the Secretary of Housing and Urban Development and Director of 

the Office of Management and Budget and make copies available to others 

upon request. In addition, this report will be available at no charge on the 

GAO Web site at http://www.gao.gov. 
Page 33 GAO-05-875 Mortgage Financing

If you or your staff have any questions about this report, please contact me 

at (202) 512-8678 or shearw@gao.gov. Contact points for our offices of

Congressional Relations and Public Affairs may be found on the last page 

of this report. GAO staff who made key contributions to this report are 

listed in appendix IV.

Sincerely yours,

William B. Shear

Director, Financial Markets and 

Community Investment
Page 34 GAO-05-875 Mortgage Financing

Appendix I

Scope and Methodology ApApenednxidexiIs

To assess the significance of the $7 billion reestimate, we interviewed 

officials at the Department of Housing and Urban Development’s (HUD) 

Federal Housing Administration (FHA) and Office of the Inspector General 

(OIG) and staff from the Office of Management and Budget (OMB). We 

reviewed the fiscal year 2000-2004 audited financial statements for FHA to 

compare the size and direction of MMI reestimates over time. We analyzed 

data from the fiscal year 2005-2006 Federal Credit Supplements to compare 

the size and direction of reestimates, by cohort, among comparable loan 

guarantee programs at FHA, the Department of Veterans Affairs, and 

Department of Agriculture. 

To determine what factors contributed to the $7 billion reestimate and the 

underlying loan performance variables influencing these factors, we 

collected and analyzed supporting documentation for the reestimate, 

including analyses prepared by FHA and work papers prepared by FHA’s 

financial statement auditor. We collected and analyzed the fiscal year 2000-

2004 actuarial reviews of the MMI Fund and related loan performance data 

to examine trends in loan performance and consider the impact that model 

changes may have had on estimated subsidy costs. We collected and 

analyzed fiscal year 2002-2003 credit subsidy cash flow models used to 

calculate the reestimates for those years, to consider the impact of loan 

performance on cash flows. We supplemented this analysis by interviewing 

the 2003 financial statement auditors, OMB staff, officials in the OIG, FHA 

staff, FHA contractors that assist in the preparation of the reestimate, and 

the 2004 actuarial review contractors for background information to verify 

our findings on the factors and underlying loan performance variables. 

To assess the control procedures governing the loan performance data we 

collected, we reviewed the findings of our previous studies in which we 

assessed the reliability of data for FHA-insured loans that came from the 

same source as the data used in this report. While the data in these 

previous reports covered a limited number of loan cohorts, the control 

activities we reviewed apply to all cohorts. In 2004 we assessed the 

reliability of a random sample of FHA-insured loans from the 1996-1999 

cohorts, comparing seven elements of the paper loan file to the electronic 

file to determine if they matched, and found no material errors. We also 

reviewed several years’ worth of FHA financial statement audits and found 

no known or suspected problems with the relevant FHA information 

systems. From these steps, we concluded these data were sufficiently 
Appendix I

Scope and Methodology

Page 35 GAO-05-875 Mortgage Financing

reliable for our analyses.1 In 2005 we obtained loan performance data on 

FHA-insured loans from the 1992, 1994, and 1996 cohorts. To verify this 

data, we met with FHA staff involved in generating the sample data set and 

discussed data quality procedures with appropriate FHA staff. FHA 

officials indicated that their data systems contain data entry checks and 

that data submitted by lenders were reviewed by FHA. As part of its annual 

financial statement audit, FHA’s data system was audited by external 

auditors, and no major issues concerning data quality were raised. Based 

on these discussions, we determined that the FHA data were sufficiently 

reliable for our analyses.2

To assess how the loan performance variables underlying the reestimate 

could impact future estimates of new loans, we interviewed FHA officials 

and the contractors for the 2004 actuarial review regarding the causes of 

the loan performance variables and their impact on future estimates. We 

also discussed recent and planned changes to the loan performance models 

that may affect FHA’s future estimates. We reviewed recent policy changes 

that may impact loan performance variables by analyzing relevant policy 

changes discussed in recent actuarial reviews and mortgagee letters issued 

by FHA through the HUD Web site. 

To assess what the reestimate and its underlying loan performance 

variables mean for the long-term viability of the Fund, we analyzed FHA 

and other data on new loan products and home mortgage industry trends. 

We reviewed prior GAO reports describing changes in the home mortgage 

market and FHA loan performance and used professional judgment to 

opine on whether earlier concerns for the viability of the Fund persist.

1

See Home Inspections: Many Buyers Benefit from Inspections, but Mandating Their Use 

Is Questionable, GAO-04-462 (Washington, D.C.: April 30, 2004).

2

See Mortgage Financing: Actions Needed to Help FHA Manage Risks from New Mortgage 

Loan Products, GAO-05-194 (Washington, D.C.: Feb. 11, 2005).
Page 36 GAO-05-875 Mortgage Financing

Appendix II

Data for Figures Used in This Report ApendxiI

Table 1: Annual Credit Subsidy Reestimates For the MMI Fund, Fiscal Years 2000-

2004 (Figure 3)

Source: GAO analysis of FHA data.

Table 2: Amount of the 2003 Reestimate Attributed to the 2001-2003 Cohorts, as a 

Percentage of the Original Loan Amount, For Single-Family Loan Guarantee 

Programs (Figure 4)

Source: GAO analysis of Federal Credit Supplements, fiscal years 2005 and 2006.

Table 3: Original Estimated Credit Subsidy Rates and Most Recent Reestimated 

Rates for the FHA and VA Loan Guarantee Programs, 1992-2004 Cohorts (Figure 5)

Dollars in millions

Fiscal year Credit subsidy reestimate

2000 $3,350

2001 -1,687

2002 1,526

2003 7,029

2004 $2,340

Agencies

Current reestimate as a percentage of

total disbursements

FHA 1.22%

VA 0.46

USDA 0.50

Cohort

Original subsidy

rate (MMI)

Fiscal year 2005

reestimate rate (MMI)

FHA

1992 -2.60% -3.03%

1993 -2.70 -2.55

1994 -2.79 -1.58

1995 -1.95 -0.44

1996 -2.77 -0.85

1997 -2.88 -1.10

1998 -2.99 -1.74

1999 -2.62 -1.95
Appendix II

Data for Figures Used in This Report

Page 37 GAO-05-875 Mortgage Financing

Source: GAO analysis of Federal Credit Supplements, fiscal years 2005 and 2006.

Table 4: Primary Factors Contributing to the Fiscal Year 2003 MMI Credit Subsidy 

Reestimate (Figure 6)

Source: GAO analysis of FHA data.

2000 -1.99 -0.55

2001 -2.15 -0.94

2002 -2.07 -1.07

2003 -2.53 -1.53

2004 -2.47 -1.61

2005 -1.82

2006 -1.70

VA

1992 2.19% 1.72%

1993 2.33 0.31

1994 1.36 -0.02

1995 1.18 -0.13

1996 1.56 0

1997 0.74 -0.25

1998 0.49 0.01

1999 0.45 0.01

2000 0.68 -0.25

2001 0.29 0.35

2002 0.39 0.27

2003 0.81 0.44

2004 0.50 -0.07

2005 -0.32

2006 -0.32

Dollars in billions

Difference between 

estimated and actual 

cash flows for FY 2003

Change in estimated

future cashflows Interest on adjustment

$2.1 $3.9 $1.1

(Continued From Previous Page)

Cohort

Original subsidy

rate (MMI)

Fiscal year 2005

reestimate rate (MMI)
Appendix II

Data for Figures Used in This Report

Page 38 GAO-05-875 Mortgage Financing

Table 5: Change in Future Cash Flow Estimates for the Fund from Fiscal Year 2002 

to Fiscal Year 2003 (Figure 7)

Source: GAO analysis of FHA financial statements, fiscal years 2002-2003.

Table 6: Variables Contributing to the $3.9 Billion Change in Estimated Cash Flows 

(Figure 8)

Source: GAO analysis of FHA data.

Table 7: Increase in Estimated Net Cash Outflows from Removing the Loss 

Mitigation Adjustment Factor, 1992-2003 Cohorts (Figure 9)

Source: GAO analysis of FHA data.

Dollars in millions

Fiscal year Amount

2002 $1,864

2003 -2,008

Dollars in billions

Loans 

originating in 

2003 Other

Removal of loss

mitigation

adjustment

Change in conditional

claim and prepayment

rates

$1.0 -$0.5 -$1.7 -$2.7

Dollars in thousands

Cohort Impact

1992 $10,979

1993 24,126

1994 32,926

1995 21,632

1996 40,131

1997 52,666

1998 108,630

1999 151,683

2000 142,118

2001 349,441

2002 451,067

2003 339,110
Appendix II

Data for Figures Used in This Report

Page 39 GAO-05-875 Mortgage Financing

Table 8: Actual Versus Estimated Conditional Claim Rates for Fiscal Year 2003, 1993-

2003 Cohorts (Figure 10)

Source: GAO analysis of FHA data.

Table 9: Actual Versus Estimated Conditional Prepayment Rates for Fiscal Year 

2003, 1993-2003 Cohorts (Figure 10)

Source: GAO analysis of FHA data.

Cohort Estimated claims Actual claims

1993 0.60% 0.48%

1994 0.58 0.53

1995 0.96 1.71

1996 0.93 1.69

1997 1.08 2.29

1998 0.95 1.75

1999 0.92 1.93

2000 1.58 4.03

2001 0.87 1.96

2002 0.32 0.50

2003 0.01 0.01

Cohort Estimated prepayments Actual prepayments

1993 17.10% 34.33%

1994 16.32 32.13

1995 17.33 29.91

1996 17.58 32.45

1997 18.20 31.33

1998 17.36 36.54

1999 16.58 35.80

2000 22.73 34.67

2001 14.37 41.63

2002 7.78 33.81

2003 1.12 7.00
Appendix II

Data for Figures Used in This Report

Page 40 GAO-05-875 Mortgage Financing

Table 10: Amount of FHA Prepayments During Fiscal Years 2000-2004 (Figure 11)

Source: GAO analysis of FHA data.

Table 11: Capital Ratio Versus Economic Value of the MMI Fund, Fiscal Years 2000-

2004 (Figure 12)

Source: GAO analysis of FHA data.

Table 12: Amortized Insurance-In-Force, Fiscal Years 2000-2004 (Figure 13)

Source: GAO analysis of FHA data.

Dollars in millions

Fiscal year Prepayment

2000 $37,576

2001 82,260

2002 121,154

2003 190,370

2004 123,029

Dollars in millions

Fiscal year Economic value Capital ratio

2000 $16,962 3.51%

2001 18,510 3.75

2002 22,636 4.52

2003 22,736 5.21

2004 21,977 5.53

Dollars in millions

Fiscal year Amortized insurance in force

2000 $449,867

2001 459,305

2002 466,598

2003 406,619

2004 $372,373
Appendix II

Data for Figures Used in This Report

Page 41 GAO-05-875 Mortgage Financing

Table 13: Minimum Required Capital Ratio Versus Actual Capital Ratio (Figure 14)

Source: GAO analysis of FHA data.

Fiscal year Capital ratio

Required minimum

capital ratio

2000 3.51% 0.02

2001 3.75 0.02

2002 4.52 0.02

2003 5.21 0.02

2004 5.53 0.02
Page 42 GAO-05-875 Mortgage Financing

Appendix III

Comments from the Department of Housing 

and Urban Development ApendxiI
Appendix III

Comments from the Department of Housing 

and Urban Development

Page 43 GAO-05-875 Mortgage Financing
Page 44 GAO-05-875 Mortgage Financing

Appendix IV

GAO Contact and Staff Acknowledgments AppendxiIV

GAO Contact William B. Shear (202) 512-8678

Staff 

Acknowledgments

In addition to the above, Mathew Scirè, Assistant Director, Anne Cangi, 

Marcia Carlsen, Emily Chalmers, Austin Kelly, Mamesho Macaulay, Marc 

Molino, and Katherine Trimble made key contributions to this report.

(250223)
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